4000 - Advisory Opinions

This is in response to your letter of April 23, 1985, which is
supplemented by a letter of June 24, 1985. You request our confirmation
that section 337.4(e)(4) of our regulations does not prohibit an
insured nonmember bank which serves as trustee to a unit investment
trust ("trust") from making nondiscretionary advances to the
trust that are required by a trust agreement entered into prior to an
underwriting or distribution of units in the trust by an affiliate of
the bank.

Section 337.4(e)(4) prohibits an insured nonmember bank which has a
subsidiary or affiliate that engages in the sale, distribution, or
underwriting of stocks, bonds, debentures, notes, or other securities,
or acts as an investment adviser to any investment company from
extending credit or making any loan directly or indirectly to any
investment company whose shares are currently underwritten or
distributed by such subsidiary or affiliate of the bank.

Where a subsidiary or affiliate of an insured nonmember bank acts as
trustee to an investment company, the above regulatory provision would
appear to prohibit extensions of credit to that investment company at a
time when the securities of that investment company are being
underwritten by the subsidiary or the affiliate of the bank.

You suggest that a unit investment trust issuing units representing
an undivided fractional interest in an unmanaged portfolio of
securities presents a different situation from that found with respect
to managed investment portfolios of other types of investment
companies. You point out that a unit investment trust has no investment
adviser, normally consists of high grade bonds with a fixed debt
return, and is subject to extremely limited discretion on the part of
the sponsor and trustee of the fund. The trustee of the unit investment
trust primarily issues units, collects interest from the various
issuers of the securities in the fund, and distributes the pro rata
share of the interest payments to the various security holders of the
fund.

Because of timing differences in the interest payments received from
the issuers of the securities and the distribution dates elected by the
various security holders of the fund, the trustee encounters cash
shortfalls in its custodial account. The trust agreement normally
provides that the trustee advance funds to the trust subject to
repayment upon receipt of interest payments from the issuers of the
securities. After an initial period of perhaps 30
months, the trustee is unlikely to
experience cash shortfalls for more than a brief period. The trustee is
not required to bear any practical risk of loss with respect to these
shortfalls since it can recover monies advanced from subsequent
interest payments. The trustee is protected from most liability and
loss by the terms of the trust agreement. At any rate, the commitment
to extend credit is made at the time that the trustee accepts the trust
rather than at the time that the need for extending credit to the trust
arises.

You note that section 337.4(e)(3) contains an interpretive footnote
that makes it clear that the prohibition in that paragraph against
extensions of credit should not be construed to prohibit a bank from
honoring a loan commitment entered into prior in time to an
underwriting or distribution. You suggest that, in the case of a unit
investment trust, the bank's commitment to extend credit was arranged
prior to any bank affiliate underwriting or distributing of the
securities. Thus, you suggest that the danger of the bank overextending
itself to unit investment trusts underwritten or distributed by an
affiliate is not apparent.

Section 337.4 in general was designed in great part to prevent a
bank from improvidently extending credit to assist securities
affiliates or to issuers in which securities affiliates were strongly
involved. Subparagraph (e)(4) in particular was designed to prevent a
bank from improvidently lending to investment companies in which its
securities affiliates were involved in order to save such investment
companies from liquidity crises which can arise.

Under the facts you have presented to us, the commitment of the bank
as trustee is not definite but appears limited and is apparently
collateralized. You mention that the bank is primarily required to meet
cash flow shortages with respect to the collection and payment of
interest to security holders and other administrative costs. You
indicate that these advances may be reimbursable from the assets in the
custody of the trustee. You further indicate that the trustee is
protected by the terms of an agreement against most liabilities. We are
satisfied based upon the particular nature of the relationship
described in your letter that the advances in question do not pose the
type of indeterminate risk section 337.4(e)(4) was primarily designed
to meet. We are therefore prepared to conclude that section 337.4(e)(4)
does not extend to a bank (as trustee for a unit trust distributed by
the bank's affiliate) making advances to the trust in accordance with
the trust agreement to cover accrued but unpaid interest due to unit
holders provided that the following circumstances are met:

1. Accrued interest advances or extension of credit must be
reimbursable from assets in the actual or constructive possession of
the bank trustee in such a fashion as to constitute a perfected
security interest under local law and in sufficient amounts to equal or
exceed the collateral requirements that would be required by Section
23A of the Federal Reserve Act.

2. The trustee bank must not be required to lend funds with
respect to the redemption of outstanding securities. Even though not
required by the trust agreement, the trustee must not in fact lend
funds, in substantial quantity, for the redemption of securities.

We assume that the trustee bank will not lend funds for the purchase
of the trust's securities by any other person or issue letters of
credit with respect to the obligations of or otherwise extend credit to
portfolio issuers or their
affiliates.